Important changes to annual leave entitlement and holiday pay now in force

Some important changes to the Working Time Regulations have been introduced. The Employment Rights (Amendment, Revocation and Transitional Provision) Regulations 2023 came into force on 1 January 2024 and:

Define what is considered ‘normal remuneration’
Codify the EU case law on the carry-over of unused holidays
Introduce new rules on annual leave accrual and holiday pay for 'irregular hours and part-year workers' for holiday years starting on or after 1 April 2024.

What payments need to be included when calculating holiday pay?

Workers have a statutory right to 4 weeks' basic EU derived annual leave ('basic leave') and to 1.6 weeks' additional domestic annual leave ('additional leave'). For workers with normal working hours basic leave must be paid at their 'normal' rate of pay. From 1 January 2024, the legislation states that the following payments ('task, status and regular payments') must be included in holiday pay for the 4 weeks of basic leave:

Payments, including commission payments, intrinsically linked to the performance of tasks which a worker is obliged under their contract to carry out
Payments for professional or personal status relating to length of service, seniority or professional qualifications
Payments, such as overtime payments, which have been regularly paid to a worker in the 52 weeks preceding the calculation date.

This does not apply to the 1.6 weeks of additional leave, which can therefore continue to be restricted to 'basic' pay unless the contract provides otherwise.

When can a worker carry over unused holidays?

Statutory annual leave must be taken in the leave year in which it accrued, unless (i) a 'relevant agreement' (a workforce agreement, collective agreement, or individual agreement between worker and employer) allows all or part of the additional 1.6 weeks' leave to be carried over into the next leave year; or (ii) it is unused for one of the following reasons:

The worker was unable to take leave as a result of taking a period of maternity or other family related leave. This applies to both the 4 weeks' basic leave and the additional 1.6 weeks' leave. Any untaken leave will be carried forward into the following leave year.
The worker was unable to take leave as a result of taking a period of sick leave. This applies to the 4 weeks' basic annual leave only. The carried over leave must be taken within 18 months of the leave year to which it relates.
The employer failed to (i) recognise the worker's right to annual leave or paid annual leave; (ii) give the worker a reasonable opportunity to take leave or encourage them to do so; or (iii) inform the worker that leave not taken by the end of the leave year will be lost. This applies to the 4 weeks' basic annual leave only. In these cases, the right to take the carried-over leave will last until the end of the first full leave year in which there is no such failure by the employer.

The rules introduced in 2020 allowing leave to be carried forward for two years where it was not reasonably practicable to take it because of Covid-19 were repealed on 1 January 2024. Any accrued holiday previously carried over under those rules must be used by 31 March 2024.

Definition of irregular hours and part-year workers

A new category of worker is being introduced for holiday years which start on or after 1 April 2024:

A worker is an irregular hours worker, in relation to a leave year, if the number of paid hours that they will work in each pay period during the term of their contract in that year is, under the terms of their contract, wholly or mostly variable.
A worker is a part-year worker, in relation to a leave year, if, under the terms of their contract, they are required to work only part of that year and there are periods within that year (during the term of the contract) of at least a week which they are not required to work and for which they are not paid.

These definitions throw up some interesting questions. For example, is a worker who mostly works variable hours, but is required to work consistent hours during a busy three-month period, an irregular hours worker? Is a term-time worker, who receives an annualised salary paid every month, a part-year worker?

Annual leave accrual for irregular hours and part-year workers

Holiday for irregular hours and part-year workers will accrue on the last day of each pay period at the rate of 12.07% (5.6 weeks' statutory annual leave divided by 46.4 working weeks) of the actual hours worked in that pay period, up to a maximum of 28 days per year. This means that these workers will build up holiday entitlement as they work over the year rather than getting it all at the start of the holiday year. There are special rules for accruing holiday during sickness and family related leave.

The distinction that exists between basic leave and additional leave for workers with normal working hours will not exist for irregular hours and part-year workers. The rules outlined above in relation to holiday pay and carry over apply to their full 5.6 weeks' statutory holiday entitlement.

Holiday pay for irregular hours and part-year workers

In respect of holiday years from 1 April 2024, employers will be able to choose from two systems of paying holiday pay to irregular hours and part-year workers:

Pay holiday pay when holiday is taken, using an average from the last 52 weeks in which the worker worked and was paid. Calculations will be required every time holiday is taken.
Pay rolled-up holiday pay, payable as an uplift of 12.07% to the worker's total remuneration for work done in each pay period. Rolled-up holiday pay must be paid at the same time as pay for the work done and shown as a separate item on payslips.

Irregular hours and part-year workers will have their statutory holiday entitlement paid at a rate based on their total pay (including any 'task, status and regular payments'), whether it is calculated as rolled-up holiday pay or by reference to the previous 52 weeks. There are special rules for calculating a week's pay and rolled-up holiday pay for workers who have been on sick leave or family related leave.

In practice

Review your holiday pay calculations for any workers receiving regular additional allowances, such as commission, bonus, and standby allowances.
Check that your policies comply with the rules on carry over of holidays following periods of sick or family related leave.
Encourage workers to take their holidays and remind them to use up their holiday entitlement before it is lost at the end of the leave year.
If you have workers who will count as irregular hours or part-year workers, review your current approach to accrual and holiday pay. If you are going to use rolled-up holiday pay, ensure that (i) workers still have at least 5.6 weeks off work a year, and (ii) holiday pay is clearly itemised on payslips.

Holidays and holiday pay webinar

To find out more about the new rules and the practical implications, join us on 31 January 2024 for a free webinar: Holidays and holiday pay: new legislation in force for 2024. Lynne Marr and Will Rollinson will look at the rules on:

Accruing annual leave and carryover rights
Calculating holiday pay – what is 'normal pay' under the new Regulations?
Calculating holiday entitlement and pay for irregular hours and part-year workers
- Rolled up holiday pay – is it now lawful?
- The return of the 12.07% approach to calculating holiday pay…
Record keeping.